USMCA: Investment Provisions
link to page 1 
Updated January 8, 2020
USMCA: Investment Provisions
The United States-Mexico-Canada Agreement (USMCA) is
Figure 1. U.S. FDI Positions with NAFTA Partners
a proposed free trade agreement (FTA) that, if approved by
Congress and ratified by Canada and Mexico, would
replace the North American Free Trade Agreement
(NAFTA). USMCA would retain NAFTA’s market-
opening measures while adding or updating provisions in
areas such as digital trade, intellectual property rights, and
worker rights. The proposed agreement would make notable
changes to NAFTA’s investment provisions—mainly
qualifying basic investor protections and limiting the degree
to which foreign investors can bring complaints against
their host states under the investor-state dispute settlement
(ISDS) mechanism. ISDS claims with Canada would be
phased out entirely; those with Mexico would be more
restricted than under NAFTA. Given the significant
Source: Bureau of Economic Analysis, Hist. Cost Basis, 1993-2018.
changes proposed and the importance of U.S. investment
ties with Canada and Mexico, USMCA’s investment
Investor Protections under USMCA
provisions are an active part of congressional debate over
The proposed USMCA contains many of the same core
the USMCA.
investment provisions as NAFTA, but with new
NAFTA’s Investment Provisions
qualifications and provisions that reflect more recent U.S.
trade and investment agreements. New limits are placed on
Enacted in 1994, NAFTA removed investment barriers,
what provisions are eligible for ISDS, compared to NAFTA
ensured basic investment protections, and provided
and past U.S. FTAs.
mechanisms for the settlement of disputes over
commitments in the agreement. Since NAFTA entered into
Minimum Standard of Treatment (MST). Like NAFTA,
force, the stock of foreign direct investment (FDI) between
the proposed USMCA would require that each party accord
the United States and its NAFTA partners has increased
covered investments “treatment in accordance with
dramatically, although it is difficult to determine whether
customary international law.” However, the proposed
the increase was the result of NAFTA or other factors
agreement would add new clarifications, stating that the
(Figure 1). In 2018, Canada and Mexico ranked fifth and
concepts of “fair and equitable treatment” (due process) and
thirteenth, respectively, as destinations for U.S. FDI and
“full protection and security” (police protection) do not
second and twenty-first as sources of FDI in the United
require treatment in addition to or beyond the minimum
States.
standard treatment of aliens under customary international
In response to criticism that NAFTA’s investment
law. Previously, some ISDS tribunals had suggested
otherwise. The proposed USMCA would further clarify that
protections were too broad, subsequent U.S. trade and
an action, such as the implementation of a new regulation,
investment agreements clarified certain provisions and
would not be a breach of MST simply because it was
added new transparency requirements. The proposed
inconsistent with an investor’s expectations.
USMCA would continue some of these trends.
Additionally, the proposed USMCA would place new limits
National Treatment and Most-Favored-Nation (MFN)
on access to ISDS mechanisms. In general, these changes
Treatment. Like NAFTA and other U.S. FTAs, the
limit the kinds of claims that foreign investors are able to
proposed USMCA would include nondiscrimination
bring in response to domestic regulations.
provisions, requiring that each country accord the investors
and investments of another country treatment no less
Definition of an Investment
favorable than that it accords, in like circumstances, to its
USMCA’s investment chapter defines “investment” more
own investors or the investors of any other country
broadly than NAFTA and echoes the language of more
throughout the lifecycle of the investment. However, the
recent U.S. FTAs. Whereas NAFTA enumerates what
proposed USMCA adds further language noting that
qualifies as an investment, the proposed USMCA defines
whether treatment is accorded in “like circumstances”
an investment as an asset that an investor owns or controls
depends on the totality of the circumstances, including
that has the characteristics of an investment such as the
whether the treatment at issue distinguishes between
commitment of capital or other resources, the expectation
investors or investments based on legitimate public welfare
of gain or profit, or the assumption of risk. It then
objectives.
enumerates a nonexhaustive list of examples that could
Expropriation and Compensation. Like NAFTA, the
include enterprises, stocks, bonds, derivatives, intellectual
proposed USMCA states that expropriation may only occur
property, licenses, or other tangible or intangible property.
https://crsreports.congress.gov
link to page 2
USMCA: Investment Provisions
for a public purpose and must be done in a
Procedure and Transparency. The proposed USMCA
nondiscriminatory manner, with prompt, adequate, and
includes updated provisions on panel selection,
effective compensation, and in accordance with due process
transparency, and would require compliance with the
of law. While indirect (also known as regulatory)
International Bar Association Guidelines on Conflicts of
expropriation is still included, the proposed USMCA
Interest in International Arbitration and would forbid
affirms that nondiscriminatory regulatory actions designed
arbitrators from acting in another capacity in any other
to protect legitimate public welfare objectives would not
pending arbitration under the agreement.
constitute indirect expropriation except in “rare
circumstances,” similar to language in more recent U.S.
Figure 2. NAFTA’s ISDS Record (No. of Disputes)
FTAs. USMCA would also place new limits on the
enforceability of this provision through ISDS.
Investor-State Dispute Settlement
To provide investors “due process before an impartial
tribunal,” NAFTA enabled foreign investors to take host
governments to binding arbitration over alleged violations
of investment commitments in the agreement. The proposed
USMCA eliminates ISDS with respect to Canada and
places new restrictions on its use with respect to Mexico.
The new restrictions limit what kinds of alleged violations
investors may bring before ISDS tribunals. The changes,
however, would not disrupt pending ISDS cases under
Source: United Nations Conference on Trade and Development.
NAFTA and allow new claims under NAFTA rules for
Summary and Issues for Congress
three years from the date of NAFTA’s termination.
NAFTA’s provisions removed barriers to investment and
The United States and Canada
established core protections to ensure nondiscriminatory
Three years after the proposed USMCA goes into effect,
treatment, among other objectives, with the goal of
ISDS mechanisms under NAFTA between the United
increasing trade and investment across North America. The
States and Canada would be phased out. Absent an
proposed USMCA includes many of those same protections
independent agreement, U.S. or Canadian investors alleging
but with qualifications in line with more recent U.S. trade
a violation of USMCA by their host government would
and investment agreements, as well as new limitations.
only have recourse to domestic courts or other dispute
The biggest change from NAFTA and recent U.S. FTAs is
resolution mechanisms. Under NAFTA, the bulk of
the curtailment of ISDS. Supporters of NAFTA’s ISDS
disputes brought before ISDS tribunals have involved
mechanism argue that it provides investors a neutral and
Canadian or U.S. claimants. Canadians initiated 16 of the
effective venue for resolving disputes with their host states.
17 ISDS cases against the United States (Figure 2).
Under this view, NAFTA’s ISDS mechanism encourages
The United States and Mexico
investment, particularly where investors might otherwise
New Limitations. The proposed USMCA retains ISDS
worry about the effectiveness of local courts in dealing with
with respect to Mexico but investors could only bring
specialized investment issues and discriminatory treatment
claims alleging a breach of national treatment, a breach of
without impartial recourse. Opponents, however, have
most-favored-nation treatment, or for direct expropriation.
raised concerns that NAFTA’s ISDS mechanism (i)
Claims alleging a violation of national treatment with
provides procedural rights to foreign investors that are
respect to the establishment or acquisition of an investment
unavailable to domestic investors and (ii) discourages states
(the so-called “right to invest” provision), claims alleging a
from implementing health and environmental regulations,
violation of the MST, and claims alleging indirect (or
among other concerns.
regulatory) expropriation, all of which made up the bulk of
Robust ISDS provisions have been a part of U.S. trade
ISDS claims made under NAFTA, would no longer be
agreements for decades, and investor protections have been
covered. Such claims could still be dealt with through
long-standing U.S. trade negotiating objectives. Congress
USMCA state-to-state dispute settlement measures.
may wish to consider whether the proposed USMCA
Exhaustion of Local Remedies. Unlike in NAFTA and
represents a discrete departure from past U.S. policy or a
other U.S. FTAs, USMCA would require investors to
new paradigm for future trade agreements.
“exhaust local remedies” by first filing their complaints in
the courts or administrative tribunals of the host state and
Further Reading
waiting 30 months before initiating arbitration (unless such
CRS Report R44981, NAFTA Renegotiation and the
action would be “obviously futile or ineffective”).
Proposed United States-Mexico-Canada Agreement
(USMCA), by M. Angeles Villarreal and Ian F. Fergusson.
Exceptions for Energy and Infrastructure. The above
limitations would not apply to covered government
contracts with the oil and gas, power generation,
telecommunication, transportation, and infrastructure
sectors. Claimants in the sectors may use ISDS for a breach
Christopher A. Casey, Analyst in International Trade and
of any provision of the agreement and need not exhaust
Finance
local remedies.
https://crsreports.congress.gov
USMCA: Investment Provisions
IF11167
M. Angeles Villarreal, Specialist in International Trade
and Finance
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11167 · VERSION 4 · UPDATED
Updated January 8, 2020
USMCA: Investment Provisions
The United States-Mexico-Canada Agreement (USMCA) is
Figure 1. U.S. FDI Positions with NAFTA Partners
a proposed free trade agreement (FTA) that, if approved by
Congress and ratified by Canada and Mexico, would
replace the North American Free Trade Agreement
(NAFTA). USMCA would retain NAFTA’s market-
opening measures while adding or updating provisions in
areas such as digital trade, intellectual property rights, and
worker rights. The proposed agreement would make notable
changes to NAFTA’s investment provisions—mainly
qualifying basic investor protections and limiting the degree
to which foreign investors can bring complaints against
their host states under the investor-state dispute settlement
(ISDS) mechanism. ISDS claims with Canada would be
phased out entirely; those with Mexico would be more
restricted than under NAFTA. Given the significant
Source: Bureau of Economic Analysis, Hist. Cost Basis, 1993-2018.
changes proposed and the importance of U.S. investment
ties with Canada and Mexico, USMCA’s investment
Investor Protections under USMCA
provisions are an active part of congressional debate over
The proposed USMCA contains many of the same core
the USMCA.
investment provisions as NAFTA, but with new
NAFTA’s Investment Provisions
qualifications and provisions that reflect more recent U.S.
trade and investment agreements. New limits are placed on
Enacted in 1994, NAFTA removed investment barriers,
what provisions are eligible for ISDS, compared to NAFTA
ensured basic investment protections, and provided
and past U.S. FTAs.
mechanisms for the settlement of disputes over
commitments in the agreement. Since NAFTA entered into
Minimum Standard of Treatment (MST). Like NAFTA,
force, the stock of foreign direct investment (FDI) between
the proposed USMCA would require that each party accord
the United States and its NAFTA partners has increased
covered investments “treatment in accordance with
dramatically, although it is difficult to determine whether
customary international law.” However, the proposed
the increase was the result of NAFTA or other factors
agreement would add new clarifications, stating that the
(Figure 1). In 2018, Canada and Mexico ranked fifth and
concepts of “fair and equitable treatment” (due process) and
thirteenth, respectively, as destinations for U.S. FDI and
“full protection and security” (police protection) do not
second and twenty-first as sources of FDI in the United
require treatment in addition to or beyond the minimum
States.
standard treatment of aliens under customary international
In response to criticism that NAFTA’s investment
law. Previously, some ISDS tribunals had suggested
otherwise. The proposed USMCA would further clarify that
protections were too broad, subsequent U.S. trade and
an action, such as the implementation of a new regulation,
investment agreements clarified certain provisions and
would not be a breach of MST simply because it was
added new transparency requirements. The proposed
inconsistent with an investor’s expectations.
USMCA would continue some of these trends.
Additionally, the proposed USMCA would place new limits
National Treatment and Most-Favored-Nation (MFN)
on access to ISDS mechanisms. In general, these changes
Treatment. Like NAFTA and other U.S. FTAs, the
limit the kinds of claims that foreign investors are able to
proposed USMCA would include nondiscrimination
bring in response to domestic regulations.
provisions, requiring that each country accord the investors
and investments of another country treatment no less
Definition of an Investment
favorable than that it accords, in like circumstances, to its
USMCA’s investment chapter defines “investment” more
own investors or the investors of any other country
broadly than NAFTA and echoes the language of more
throughout the lifecycle of the investment. However, the
recent U.S. FTAs. Whereas NAFTA enumerates what
proposed USMCA adds further language noting that
qualifies as an investment, the proposed USMCA defines
whether treatment is accorded in “like circumstances”
an investment as an asset that an investor owns or controls
depends on the totality of the circumstances, including
that has the characteristics of an investment such as the
whether the treatment at issue distinguishes between
commitment of capital or other resources, the expectation
investors or investments based on legitimate public welfare
of gain or profit, or the assumption of risk. It then
objectives.
enumerates a nonexhaustive list of examples that could
Expropriation and Compensation. Like NAFTA, the
include enterprises, stocks, bonds, derivatives, intellectual
proposed USMCA states that expropriation may only occur
property, licenses, or other tangible or intangible property.
https://crsreports.congress.gov
link to page 2
USMCA: Investment Provisions
for a public purpose and must be done in a
Procedure and Transparency. The proposed USMCA
nondiscriminatory manner, with prompt, adequate, and
includes updated provisions on panel selection,
effective compensation, and in accordance with due process
transparency, and would require compliance with the
of law. While indirect (also known as regulatory)
International Bar Association Guidelines on Conflicts of
expropriation is still included, the proposed USMCA
Interest in International Arbitration and would forbid
affirms that nondiscriminatory regulatory actions designed
arbitrators from acting in another capacity in any other
to protect legitimate public welfare objectives would not
pending arbitration under the agreement.
constitute indirect expropriation except in “rare
circumstances,” similar to language in more recent U.S.
Figure 2. NAFTA’s ISDS Record (No. of Disputes)
FTAs. USMCA would also place new limits on the
enforceability of this provision through ISDS.
Investor-State Dispute Settlement
To provide investors “due process before an impartial
tribunal,” NAFTA enabled foreign investors to take host
governments to binding arbitration over alleged violations
of investment commitments in the agreement. The proposed
USMCA eliminates ISDS with respect to Canada and
places new restrictions on its use with respect to Mexico.
The new restrictions limit what kinds of alleged violations
investors may bring before ISDS tribunals. The changes,
however, would not disrupt pending ISDS cases under
Source: United Nations Conference on Trade and Development.
NAFTA and allow new claims under NAFTA rules for
Summary and Issues for Congress
three years from the date of NAFTA’s termination.
NAFTA’s provisions removed barriers to investment and
The United States and Canada
established core protections to ensure nondiscriminatory
Three years after the proposed USMCA goes into effect,
treatment, among other objectives, with the goal of
ISDS mechanisms under NAFTA between the United
increasing trade and investment across North America. The
States and Canada would be phased out. Absent an
proposed USMCA includes many of those same protections
independent agreement, U.S. or Canadian investors alleging
but with qualifications in line with more recent U.S. trade
a violation of USMCA by their host government would
and investment agreements, as well as new limitations.
only have recourse to domestic courts or other dispute
The biggest change from NAFTA and recent U.S. FTAs is
resolution mechanisms. Under NAFTA, the bulk of
the curtailment of ISDS. Supporters of NAFTA’s ISDS
disputes brought before ISDS tribunals have involved
mechanism argue that it provides investors a neutral and
Canadian or U.S. claimants. Canadians initiated 16 of the
effective venue for resolving disputes with their host states.
17 ISDS cases against the United States (Figure 2).
Under this view, NAFTA’s ISDS mechanism encourages
The United States and Mexico
investment, particularly where investors might otherwise
New Limitations. The proposed USMCA retains ISDS
worry about the effectiveness of local courts in dealing with
with respect to Mexico but investors could only bring
specialized investment issues and discriminatory treatment
claims alleging a breach of national treatment, a breach of
without impartial recourse. Opponents, however, have
most-favored-nation treatment, or for direct expropriation.
raised concerns that NAFTA’s ISDS mechanism (i)
Claims alleging a violation of national treatment with
provides procedural rights to foreign investors that are
respect to the establishment or acquisition of an investment
unavailable to domestic investors and (ii) discourages states
(the so-called “right to invest” provision), claims alleging a
from implementing health and environmental regulations,
violation of the MST, and claims alleging indirect (or
among other concerns.
regulatory) expropriation, all of which made up the bulk of
Robust ISDS provisions have been a part of U.S. trade
ISDS claims made under NAFTA, would no longer be
agreements for decades, and investor protections have been
covered. Such claims could still be dealt with through
long-standing U.S. trade negotiating objectives. Congress
USMCA state-to-state dispute settlement measures.
may wish to consider whether the proposed USMCA
Exhaustion of Local Remedies. Unlike in NAFTA and
represents a discrete departure from past U.S. policy or a
other U.S. FTAs, USMCA would require investors to
new paradigm for future trade agreements.
“exhaust local remedies” by first filing their complaints in
the courts or administrative tribunals of the host state and
Further Reading
waiting 30 months before initiating arbitration (unless such
CRS Report R44981, NAFTA Renegotiation and the
action would be “obviously futile or ineffective”).
Proposed United States-Mexico-Canada Agreement
(USMCA), by M. Angeles Villarreal and Ian F. Fergusson.
Exceptions for Energy and Infrastructure. The above
limitations would not apply to covered government
contracts with the oil and gas, power generation,
telecommunication, transportation, and infrastructure
sectors. Claimants in the sectors may use ISDS for a breach
Christopher A. Casey, Analyst in International Trade and
of any provision of the agreement and need not exhaust
Finance
local remedies.
https://crsreports.congress.gov
USMCA: Investment Provisions
IF11167
M. Angeles Villarreal, Specialist in International Trade
and Finance
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11167 · VERSION 4 · UPDATED